THG - Hanover Insurance: Inflation Placing Pressure On Personal Lines Segment

Summary

• Hanover Insurance Group has continued to see resilient performance across its Core Commercial segment.
• However, a rising combined ratio across the Personal Lines segment remains concerning.
• The stock could see modest growth in the short to medium term.

Investment Thesis: While performance across the Core Commercial segment remains resilient, a continued rise in the combined ratio for the Personal Lines segment could be of concern to investors and hinder growth in the short to medium-term.

In a previous article back in November, I made the argument that Hanover Insurance Group ( THG ) has seen encouraging performance across its Core Commercial segment, while adding a caveat that a lower combined ratio across the Personal Lines segment would significantly strengthen the upside prospects for the company.

Since my last article, the stock is down by just over 5% overall.

The purpose of this article is to assess if Hanover Insurance Group could see scope to rebound further from here.

Performance

With an impact of $165 million of catastrophe losses resulting from Storm Elliott in the last quarter - Hanover Insurance Group saw an overall quarterly combined ratio of 108% including catastrophic losses and 94.1% excluding catastrophic losses. This compares to a ratio of 101% and 94.2% excluding catastrophic losses for Q3 2022 .

On a yearly basis, the combined ratio is up on that of last year as a whole - from 89.8% in 2021 to 92.5% in 2022.

For the year ended December 31 - here is the yearly combined ratio across segments - excluding catastrophic losses:

Source: Figures sourced from Hanover Insurance Group Q4 2022 News Release: Fourth Quarter and Full Year Results.

We can see that even without catastrophic losses being accounted for - the combined ratio across Personal Lines is up quite significantly on that of last year. With inflationary pressures affecting both property and car prices - it has accordingly become more expensive for Hanover Insurance Group to cover the higher losses incurred by this segment.

The higher combined ratio would appear to suggest that losses are increasing at a higher pace than premiums which seems to indicate that demand for insurance across the Personal Lines segment is not keeping pace with the higher costs of insuring this segment.

From this standpoint - even setting aside the impact of catastrophic losses - the increase in the combined ratio across Personal Lines could be of concern to investors. With $563.3 million of net premiums written for Q4 2022 - this represents over 42% of the total net premiums written throughout the quarter - totaling over $1.3 billion.

From an income standpoint, we can see that net income per share is down significantly from that of last year:

Additionally, we can see that with a fall in total capital from that of last year - the company's debt as a percentage of total capital has now increased.

In this regard, inflationary pressures and the rise in the combined ratio across the Personal Lines segment appear to have been placing pressure on net income growth.

Looking Forward

Going forward, I take the view that Hanover Insurance Group will ultimately need to see premiums rise across its segments to combat the burden of inflation as relates to the higher cost of insuring across its business lines - particularly the Personal Lines segment where we have seen a strong increase in the combined ratio.

Moreover, with 58% of car owners expressing their view that car insurance is now too expensive and with 29% of customers having switched companies - it is likely that the pressure on premiums across this segment will continue owing to price competition. As such, it is possible that the combined ratio across the Personal Lines segment could remain elevated for this reason.

In terms of the Core Commercial segment - the combined ratio has risen minimally when excluding catastrophic losses. This is encouraging given that we saw a renewal price change of 10.2% in Core Commercial as compared to 10.1% in Personal Lines. Premium demand across the former segment remains strong in spite of inflationary pressures. However, there is little evidence to suggest that growth in this segment can make up for the pressure on premium growth that we have been seeing across Personal Lines.

Conclusion

To conclude, Hanover Insurance Group has continued to see strength across its Core Commercial segment in spite of catastrophic losses. However, a continued rise in the combined ratio for the Personal Lines segment could be of concern to investors and hinder growth in the short to medium-term.

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